Enterprise Financial Reports Third Quarter 2011 Results

• Third quarter net income of $9.7 million or $0.49 per fully diluted share, up 95% and 69%, respectively, over prior year
• Core deposits increase 48% over prior year; noninterest-bearing demand deposits up 83%
• Commercial & Industrial loans grow 3% over linked quarter and 19% over prior year period
• Nonperforming assets decrease 13% from one year ago to 2.06% of total assets
• Kansas City deposits double to $1.0 billion as a result of the Company's most recent FDIC-assisted acquisition

ST. LOUIS, Oct. 27, 2011 (GLOBE NEWSWIRE) -- Enterprise Financial Services Corp (Nasdaq:EFSC) (the "Company") reported record net income of $9.7 million for the quarter ended September 30, 2011, a 95% increase, compared to net income of $5.0 million for the prior year period. After deducting dividends on preferred stock, the Company reported net income of $0.49 per fully diluted share for the third quarter of 2011, a 69% increase, compared to net income of $0.29 per fully diluted share for the third quarter of 2010.  

As previously reported, on August 12, 2011, the Company's banking subsidiary, Enterprise Bank & Trust (the "Bank"), entered into a purchase and assumption agreement with the FDIC and acquired certain assets and assumed substantially all the deposits and other certain liabilities of The First National Bank of Olathe ("FNB"). Under the terms of the agreement, the Bank acquired certain assets of FNB with a fair value of approximately $334.7 million, including $171.0 million of loans, $73.5 million of cash and cash equivalents, $44.2 million of other real estate owned, $37.9 million of investment securities, and $8.1 million of other assets. Liabilities with a fair value of approximately $514.3 million were also assumed, including $508.9 million of insured and uninsured deposits, $1.7 million of Federal Home Loan Bank advances, and $3.7 million of other liabilities. Approximately $43.9 million of goodwill was recorded for this acquisition along with a $7.9 million core deposit intangible which reflects the quantity of deposits assumed relative to the assets and the quality of the deposit base as evidenced by the greater than ten year average age of deposit accounts. In conjunction with the agreement, the Bank also entered into shared-loss agreements whereby the FDIC will reimburse the Bank for 80% of losses up to $112.6 million, 0% of losses between $112.6 million and $148.9 million and 80% of losses in excess of $148.9 million with respect to certain loans and other real estate covered under the agreement. As part of the acquisition, the Company granted the FDIC a Value Appreciation Instrument whereby 1.0 million units were awarded to the FDIC at an exercise price of $13.59 per unit. The units are exercisable at any time from August 19, 2011 until August 10, 2012.   

The FNB acquisition is expected to add $0.18 to $0.22 to the Company's fully diluted earnings per share in 2011. 

Peter Benoist, President and CEO, commented, "Our strong third quarter results were driven by a continuing trend of organic commercial loan growth, accelerated payoffs on our covered loan portfolio and steady progress in improving credit quality."

"As demonstrated again during this past quarter, we continue to seek out and act on opportunities to build our franchise," said Benoist. "We acquired The First National Bank of Olathe, our fourth FDIC-assisted transaction, doubling our deposit base in Kansas City to more than $1 billion. This acquisition was facilitated by our successful $35 million common equity raise in the second quarter. We also hired an experienced asset-based lending team from a leading competitor, enhancing our commercial lending capabilities, and recruited several more senior bankers to our platform. In addition, in October, we acquired an additional banking location in St. Louis. Over the course of the past two years we've materially strengthened our competitive position in all three of our markets."

On a pre-tax, pre-provision basis, the Company's operating income was $20.0 million in the third quarter of 2011, a 6% decrease from the linked quarter and a 22% increase from the prior year period. The third quarter decrease in pre-tax, pre-provision operating income was primarily attributable to lower yields on covered assets relative to the second quarter.

Pre-tax, pre-provision income, which is a non-GAAP (Generally Accepted Accounting Principles) financial measure, is presented because the Company believes adjusting its results to exclude loan loss provision expense, sales and fair value writedowns of other real estate, and sales of securities provides shareholders with a more comparable basis for evaluating period-to-period operating results. A schedule reconciling GAAP pre-tax income to pre-tax, pre-provision income is provided in the attached tables.

Banking Segment 

Deposits

Total deposits at September 30, 2011 were $2.8 billion, an increase of $406.1 million, or 17%, over June 30, 2011 and $777.5 million, or 38%, higher than September 30, 2010.   

Core deposits, which exclude brokered certificates of deposit and include reciprocal CDARS deposits, represented 96% of total deposits at September 30, 2011, up from 94% in the linked quarter and 89% in the prior year period. 

The FNB acquisition added $423.1 million in deposits in the third quarter of 2011. These deposits included $66.9 million in noninterest-bearing demand deposits, $123.6 million in money market and other interest-bearing transaction accounts, and $232.6 million in certificates of deposit.

Excluding deposits associated with FNB, total deposits decreased $16.9 million in the third quarter of 2011, primarily due to a $96.6 million reduction in certificates of deposit. Approximately $76.6 million of the decrease, including $16.0 million of reciprocal CDARS certificates of deposit, was the result of the Company's efforts to lower the cost of interest-bearing deposits. The remaining $20.0 million was due to matured Brokered certificates of deposits that were not replaced. Reciprocal CDARS certificates were reduced to $19.3 million at September 30, 2011 compared to $35.3 million at June 30, 2011 and $171.5 million at September 30, 2010. Brokered certificates of deposit were reduced to $126.6 million at September 30, 2011 compared to $146.6 million at June 30, 2011 and $218.0 million at September 30, 2010.   

Noninterest bearing demand deposits excluding FNB rose $16.7 million, or 3.5%, in the linked quarter and $186.2 million, or 61.2%, from the prior year period. Noninterest bearing demand deposits represented 20% of total deposits at September 30, 2011 and June 30, 2011 and 15% at September 30, 2010. Money market and other interest bearing accounts, excluding FNB, increased $62.9 million in the third quarter, or 5.4%, and $333.6 million, or 37.0%, over the prior year period. 

Loans

Portfolio loans totaled $2.2 billion at September 30, 2011, including $343.1 million of loans covered under FDIC shared-loss agreements. Portfolio loans covered under FDIC shared-loss agreements, at fair value, increased $162.8 million, or 90%, in the third quarter, as a result of the FNB acquisition. Excluding the loans covered under loss share, portfolio loans increased $41.7 million, or 2%, in the third quarter of 2011. 

Excluding the loans covered under loss share, Commercial & Industrial loans increased $17.8 million, or 3%, during the quarter and represented one-third of the Company's loan portfolio at September 30, 2011. This growth represented the fifth consecutive quarter of increases in Commercial and Industrial loans as the Company continues to experience strong new business activity in this sector. Construction and Residential Real Estate decreased $4.6 million as the Company continued to reduce its exposure to these sectors.    

On a year over year basis, total portfolio loans increased $280.2 million, or 15%. Excluding the loans covered under loss share, portfolio loans increased $71.3 million, or 4%. Of that increase, Commercial and Industrial loans have increased $113.6 million, or 19%, since September 30, 2010, while Construction and Residential Real Estate loans have decreased $66.7 million, or, 17%, over the same time frame.

For the fiscal year 2011, the Company expects 6-8% growth in portfolio loans not covered under FDIC loss share. 

Asset quality

Nonperforming loans, including troubled debt restructurings of $12.3 million, were $48.0 million at September 30, 2011, compared to $43.1 million at June 30, 2011 and down from $52.0 million at September 30, 2010. During the quarter ended September 30, 2011, there were $16.9 million of additions to nonperforming loans, $5.0 million of charge-offs, $3.4 million of other principal reductions, and $2.9 million of assets transferred to other real estate. Four commercial real estate loans representing four relationships comprised $5.7 million, or 34% of the total new nonperforming loans, while two commercial and industrial loans representing two relationships comprised $2.5 million, or 14% of the total. Twenty seven loans and eighteen relationships comprised the remaining total new nonperforming loans.   

Nonperforming loans represented 2.17% of total loans at September 30, 2011 versus 2.15% of total loans at June 30, 2011 and 2.69% at September 30, 2010. 

Nonperforming loans by portfolio class at September 30, 2011 were as follows (in millions):

Excluding non-accrual loans and portfolio loans covered under FDIC shared-loss agreements, portfolio loans that were 30-89 days delinquent at September 30, 2011 remained at very low levels, representing 0.02% of the portfolio compared to 0.21% at June 30, 2011 and 0.09% at September 30, 2010.

Other real estate at September 30, 2011 was $77.6 million, compared to $42.8 million at June 30, 2011 and $34.7 million at September 30, 2010. Approximately $42.1 million of the third quarter increase related to FNB. Approximately 72% of total other real estate at September 30, 2011, or $56.2 million, was covered by one of four FDIC shared-loss agreements.   

Other real estate not covered by an FDIC shared-loss agreement totaled $21.4 million at September 30, 2011, a decrease of $0.4 million from June 30, 2011. At September 30, 2010 other real estate not covered by FDIC shared-loss agreements totaled $26.9 million. 

During the third quarter of 2011, the Company sold $12.2 million of other real estate, recording a gain of $517,000. Year-to-date, the Company sold $25.3 million of other real estate at a net gain of $1.0 million. 

Excluding assets covered under FDIC loss share, nonperforming assets as a percentage of total assets declined to 2.06% at September 30, 2011 from 2.18% at June 30, 2011 and 3.18% at September 30, 2010. 

Net charge-offs in the third quarter of 2011 were $4.8 million, representing an annual rate of 0.91% of average loans, compared to net charge-offs of $5.2 million, an annualized rate of 1.07% of average loans, in the linked second quarter and $5.9 million, an annualized rate of 1.23% of average loans, in the third quarter of 2010. 

Provision for loan losses was $5.6 million in the third quarter of 2011, compared to $4.6 million in the second quarter of 2011 and $7.7 million in the third quarter of 2010. The increase in the provision for loan losses in the third quarter of 2011 was due to slightly higher levels of loan risk rating downgrades. 

The Company's allowance for loan losses was 1.94% of total loans at September 30, 2011, representing 89% of nonperforming loans. The loan loss allowance was 2.10% at June 30, 2011 representing 98% of nonperforming loans and 2.43% at September 30, 2010 representing 90% of nonperforming loans.

Net Interest Income

Net interest income for the banking segment in the third quarter was flat compared to the linked second quarter. On a year over year basis, net interest income increased $7.9 million, or 31%. Including the effect of parent company debt, the net interest rate margin was 4.56% for the third quarter of 2011, compared to 4.95% for the second quarter of 2011 and 4.31% in the third quarter of 2010. In the third quarter of 2011, the loans covered under FDIC loss share yielded 18.22%, including effects of accelerated discount accretion due to cash flows on paid off covered loans. These cash flows contributed approximately $0.08 to the Company's third quarter fully diluted earnings per share.   

Absent the FDIC loss share loans, related nonearning assets and acquired deposits, the net interest rate margin was 3.37% for the third quarter of 2011 compared to 3.51% for the second quarter of 2011. The decrease in the net interest rate margin, excluding the effect of loans covered under FDIC loss share and the related funding costs, was primarily due to excess liquidity levels and a decline in the average non-covered loan yield from 5.44% at June 30, 2011 to 5.32% at September 30, 2011. Intense competition for high-quality commercial loans coupled with persistently low market rates continued to pressure loan pricing. These effects more than offset a 0.10% reduction in the cost of interest-bearing liabilities and higher levels of noninterest-bearing deposits in the quarter.

Wealth Management Segment 

Fee income from the Wealth Management segment includes Wealth Management revenue and income from state tax credit brokerage activities. Wealth Management revenue was $1.8 million in the third quarter of 2011, an increase of $174,000, or 10%, over the linked second quarter and an increase of $506,000, or 38%, compared to September 30, 2010. 

Trust assets under administration were $1.4 billion at September 30, 2011, compared to $1.6 billion at June 30, 2011 and $1.4 billion at September 30, 2010.

State tax credit brokerage activities, net of fair value marks on tax credit assets and related interest rate hedges, were $1.4 million for the third quarter of 2011, compared to $987,000 for the linked quarter of 2011 and $884,000 in the third quarter of 2010. Tax credit sales increased in the both the second and third quarters as customers deferred their purchases from the normal first quarter timing.

Other Business Results

Total capital to risk-weighted assets was 13.42% at September 30, 2011 compared to 15.98% at June 30, 2011 and 14.19% at September 30, 2010. The tangible common equity ratio was 4.72% at September 30, 2011 versus 6.78% at June 30, 2011 and 5.79% at September 30, 2010. The lower tangible common equity ratio at September 30, 2011 was attributable to the Company's acquisition of FNB during the third quarter. The Company's Tier 1 common equity ratio was 7.62% at September 30, 2011 compared to 9.31% at June 30, 2011 and 7.19% at September 30, 2010. The Company believes that the tangible common equity and the Tier 1 common equity ratios are important financial measures of capital strength even though they are considered to be non-GAAP measures and are not part of the regulatory capital requirements to which the Company is subject. The attached tables contain a reconciliation of these ratios to U.S. GAAP.

Noninterest expenses were $18.3 million for the quarter ended September 30, 2011, compared to $18.0 million for the quarter ended June 30, 2011 and $15.5 million for the quarter ended September 30, 2010. The increase over the prior year period was primarily due to increases in salaries and benefits, occupancy, data processing and other operating expenses related to acquisition activities. The increase in expenses over the prior year was partially offset by $1.1 million of lower loan legal and other real estate expenses. 

The Company's efficiency ratio was 47.0% for the quarter ended September 30, 2011 compared to 47.9% for the quarter ended June 30, 2011 and 51.0% for the prior year period. 

The Company will host a conference call at 2:30 p.m. CDT on Thursday, October 27, 2011. The call will be accessible on Enterprise Financial Services Corp's home page, at www.enterprisebank.com under "Investor Relations" and by telephone at 1-888-285-8004 (Conference ID #16756045.) Recorded replays of the conference call will be available on the website beginning two hours after the call's completion. The replay will be available for approximately two weeks following the conference call. 

Enterprise Financial Services Corp operates commercial banking and wealth management businesses in metropolitan St. Louis, Kansas City, and Phoenix. The Company is primarily focused on serving the needs of privately held businesses, their owner families, executives and professionals. 

Readers should note that in addition to the historical information contained herein, this press release contains forward-looking statements, which are inherently subject to risks and uncertainties that could cause actual results to differ materially from those contemplated from such statements. We use the words "expect" and "intend" and variations of such words and similar expressions in this communication to identify such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, burdens imposed by federal and state regulations of banks, credit risk, changes in the appraised valuation of real estate securing impaired loans, outcomes of litigation and other contingencies, exposure to local and national economic conditions, risks associated with rapid increase or decrease in prevailing interest rates, effects of mergers and acquisitions, effects of critical accounting policies and judgments, legal and regulatory developments and competition from banks and other financial institutions, as well as other risk factors described in the Company's 2010 Annual Report on Form 10-K and in its Quarterly Reports on Form 10-Q filed subsequent thereto. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events unless required under the federal securities laws.